Determinants of Trade Flows and Financing International Trade
Effect of Economic Factors on International Flow of Funds
Hosts of macro and micro economic factors have a great impact on the international flow of funds i.e. international trade. Factors such as inflation, national income, government restrictions, and exchange rates heavily influence the international trade flows. Increase in inflation will decrease the country’s exports and increase its imports thereby decreasing its current account.
Increase in the national income will also decrease the current account as imports increase. Government restrictions may reduce imports through instituting trade barriers, which may make other countries retaliate by imposing their own restrictions. The result is a decrease in the international flow of trade and funds.
When a nation’s currency begins to increase in value, it will import more causing its current account to decrease. For instance, if the US currency increases in value, imports are bound to increase in amount while exports decrease. The result is a decline in the country’s current account and subsequently a decrease in its international trade participation.
Advantages of Global Source Funding
One of the biggest benefits of global source funding is the cost savings associated with the process. Product differentiation is no longer as remarkable as it was a couple of years ago especially because of globalization. Now, a greater emphasis is placed on price competition, which makes the cost savings of the global source funding integral for the multinational companies.
Multinational companies also have the possibility of capitalizing on capabilities that are unavailable domestically. These capabilities will enable the company to improve the quality of its products and ensuring that they are available worldwide. Greater technical capabilities improve the competitive position of the multinational in the global market.
The source of funding I would select would be global sourcing. The currency will be denominated in American dollars because it is stronger than the Mexican currency. The strong performance of the dollar will mean that the firm can realize immense savings through exchange rates.